How Apple Achieves Its Bumper Earnings

Apple announced humungous earnings results on Tuesday, with net profit for the first three months of this year nearly double those of a year ago. The company said first-quarter revenues totaled a staggering US$39.2 billion, up 59 percent, while operating profit amounted to $15.4 billion, up 97 percent. Its operating margin was 39.3 percent, which means it made a profit of almost $40 for every $100 worth of products it manufactured and sold.

Main rival Samsung Electronics is estimated to have achieved W45 trillion in revenues and W5.8 trillion in operating profit in the first quarter (US$1=W1,141). But that includes money made from semiconductors, TV sets and LCD screens as well as smartphones and other mobile gadgets. Apple managed to achieve similar revenues by selling only finished mobile devices iPhone, iPad and iPod. Samsung's operating profit was only 33 percent of what Apple made.

So how was Apple able to make more money than Samsung for every product sold? The Wall Street Journal said the secret to Apple's success is focusing on a single product rather than rolling out many different models. Apple has stuck to a policy of unveiling only one new iPhone model a year, whereas Samsung rolls out around 200 new products each year, some of which sink and some of which swim. Apple also focuses on design and brand management as part of its strategy of pursuing high margins by dominating the premium market.

In contrast, Samsung has bet on volume by taking on both the premium and mid to low-priced smartphone markets. Its aim is to supply whatever consumers want. Samsung is expected to beat Apple in terms of mobile phone sales volume during the first quarter of this year to become the world's No. 1, selling between 41 million to 44 million handsets compared to 35.1 million for Apple. But it costs more money to make a wider range of products, so Samsung's profit rate lags behind Apple's. Shin Jong-kyun, the head of Samsung's mobile communications business, said Apple's earnings results were "incredible" and conceded his company had a "long way to go."

Another factor behind Apple's success is the creation of a huge stable of content via its App Store. iPhone users tend to remain loyal customers and buy new models. It focuses on staying in tune with the demands of customers through the App Store and a directly controlled retail network.

On the other hand, Apple's strong performance is a boon for Korean components manufacturers, and they include Samsung. "It's a positive factor for shares of LG Display, LG Innotek and Samsung Electro-Mechanics, which supply parts to Apple," said Lim Do-ri, an analyst at Solomon Investment and Securities. "But it could pose obstacles for LG Electronics, which needs to expand its share of the smartphone market."

Will Apple's strong performance continue? Experts say its winning strategy stands at a crossroads. As smartphones are becoming popular in China, India and other emerging markets, Apple will not be able to maintain its market share by focusing only on premium products, they say.